Market Moves

Stocks closed higher today as investors have come to live with the uncertainty associated with trade war headlines. The U.S. dollar weakened slightly to settle in at the low end of its price trend over the last year. The chart below suggests that what the dollar is doing may have an effect on the price action for stocks.

During 2017, when the dollar showed a steep downward trend, stocks showed a clear upward trend. Beginning in 2018, the dollar reversed trend and settled into a slow and steady upward trend. Ever since then, the market's volatility has been much more pronounced. If the dollar breaks through the bottom of its upward trendline and heads lower, this could be a strongly bullish sign for stocks.

Chart showing the performance of the U.S. Dollar Index and the S&P 500

Retail Surge Driven by Those With Dollars

State Street Global Advisors' sector ETF for stocks that sell consumer staples (think toothpaste, toilet paper, fast food, and cheap clothes) tracks a collection of consumer staples. This fund, the Consumer Staples Select Sector SPDR Fund (XLP), may provide a good benchmark to look at companies that sell things you can buy with a dollar. With the U.S. economy running at such low unemployment, a strong dollar buys more important goods than in days past. If consumers are able to stretch their dollar further, then the retail sector may see the benefit of consumers who feel a little more flush.

The evidence seems to play out in a few stocks shown in the chart below. Companies such as Dollar General Corporation (DG) Walmart Inc. (WMT), Dollar Tree, Inc. (DLTR), Casey's General Stores, Inc. (CASY), Target Corporation (TGT), and Amazon.com, Inc. (AMZN) have all done well this year. While these stocks have all done well this year, Amazon has surprisingly lagged this group. There are a myriad of factors in Amazon's multi-faceted business that could account for this dynamic, but is it possible that Amazon's global customer set (compared to a more domestic customer set for the other companies) could be pinched by a rising U.S. dollar?

Chart showing the stuff you can spend a dollar on

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Target Nearly Doubled in 2019

Like other stocks in the consumer staples sector, Target has done well. Unlike most of the other stocks in that sector, however, it has surprised investors with higher revenues, higher profits, and strong forward guidance. The company reaches a wider swath of those up and down the various economic strata in the U.S. and likely benefits disproportionately from full employment and a strengthening U.S. dollar.

Chart showing the performance of Target Corporation (TGT)

The Bottom Line

Stocks pressed higher today to close near former high levels. The U.S. dollar dropped and closed in a position that suggests it may drop lower, which would be an apparent good move for stocks. Retail stores have been showing stronger profits from the strengthened buying power of U.S. consumers. Target seems to have benefited the most.

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